The initial public offer (IPO) financing market in India is expected to witness healthy traction in the current financial year, supported by favourable capital markets and a line-up of prominent IPOs, said an Icra report. According to Icra, the IPO financing market is pegged at an average Rs 175 billion to Rs 225 billion per issuance and could go up to Rs 650 to Rs 700 billion for large size issuances and those with higher investor interest. “The IPO financing market was very vibrant in FY2017, supported by an increase in HNI investors’ interest in IPOs in a quest for listing gains. With banks not active in this segment due to regulatory restrictions, the field is dominated by non-banking financial company (NBFC) arms of some of the leading players in the capital markets and wealth management businesses,” said Karthik Srinivasan, senior vice president and group head (Financial Sector Ratings), Icra.
“As the HNI investments largely take place towards the last few hours of the issue, the extent of disparity between actual and expected subscription levels is likely to be limited. The NBFC arms of established capital market entities or brokerage houses also draw the advantage of market insight, by virtue of the large client network and investment banking presence, which helps them to pre-empt the investor demand and subscription levels,” he added.
The median subscription level for the non-institutional investor (NII), which include HNI investors, category stood at 80 times for the IPOs in FY2017, as against 2 times for FY2016.
Icra said this has created a market for providing short-term capital to the HNI investors for the IPO application. The HNIs deploy a small fraction of their own capital upfront, and the rest is raised through short term loans covering the period between the IPO closure and the final listing, thereby allowing the HNI investors to apply for a larger quantum while applying for the IPO.
The report said the IPO financing availed is a fixed expense for the investor, and final returns to the investors on the listing of the particular stock would need to be adjusted for this interest cost. An analysis of the issuances during the period from April 2016 to June 2017 shows that out of the total of 31 issuances, 24 issuances were listed at a premium, with median listing gains of 14%. However, after factoring in the interest expense, the HNI investors would have made positive returns in only 11 issuances.
The report added that for lenders the credit risk is contained by adjusting the initial margin requirement such that it is commensurate with the value of stocks expected to be allocated, which shields the lenders from credit as well as market risks.